How To Calculate Customer Lifetime Value For Any Business [Increase CLV For Bigger Profits]

Data is your best friend in business. 

If you aren’t gaining insights from sales data, you’re missing out on crucial information that will up-level your financial standing. 

One of the most valuable metrics to use as an online business – whether you’re offering E-learning courses, marketing strategies, or other products and services – is customer lifetime value.

Every business should calculate customer lifetime value (CLV) of their customers/clients. 

As a decision maker, this will help you understand how much money they make from each customer and how to attract and retain new customers. 

We’ll explore how to calculate CLV, so you can better understand your customers and maximize your revenue.

Customer Lifetime Value: An Overview

What is Customer Lifetime Value or CLV?

Knowing your customer lifetime value (CLV) is valuable since it enables you to determine how much revenue each client generates for your business. 

You’ll see where you can double down on marketing and client acquisition efforts and where you can grow overall when it comes to customer/client success. 76% of businesses see CLV as a very important metric for success. 

Benefits of Calculating Customer Lifetime Value 

Calculating customer lifetime value is advantageous for businesses in several ways:

  • CLV helps businesses make good use of their marketing and sales resources. For example, a business may decide to focus on either keeping high-value customers or getting new clients with a high CLV potential.
  • With CLV, businesses can predict their future income and profits. If a business knows the expected value of a customer, it can predict its future financial performance more accurately.
  • With the help of CLV, businesses can find chances to upsell and cross-sell. By knowing the value of a customer, a business can tailor its products and services to maximize the lifetime value of each customer.
  • CLV can be used by organizations to measure how well their CRM efforts are working. By watching how CLV changes over time, a business can determine how well its customer retention and loyalty programs are working.

In general, CLV is a useful tool for businesses because it helps them understand how much their customers are worth and how to use their resources to get the best return on investment.

Metrics to Know Before Calculating CLV

Knowing how to calculate Customer Lifetime Value (CLV) is essential for keeping your business profitable and thriving. There are different ways to determine CLV (we’ll share later). To start, it’s important to consider some vital metrics.

In this article, we’ll go into:

  • Average Purchase Value (APV)
  • Average Purchase Frequency Rate (APFR)
  • Average Customer Value (ACV)
  • Average Customer Lifespan (ACL)
  • Customer Retention Rate (CRR)

Average Purchase Value (APV)

In order to accurately measure Customer Lifetime Value using the APV metric, it’s important to consider not just dollar amounts but also the frequency and recency of purchases, referrals, and other associated costs. 

Organizations that monitor Average Purchase Value using predictive modeling can get a better idea of how much return on investment they’ll see in the future.

The average amount a customer spends on each purchase is called the Average Purchase Value (APV).

Formula for APV:

Divide the total sales amount by the number of sales.

Simple example of how to calculate APV:

Let’s say that in one year, 100 customers bought a total of 500 items from a business, with a total of $25,000 purchased.

$25,000 divided by 500 sales = $50

This means that this company’s average purchase value is $50.

APV is an important business metric because it shows how much money a business can expect to make from each customer purchase. This information can help you make smart decisions about pricing, making new products, and how to market them.

Average Purchase Frequency Rate (APFR)

Average Purchase Frequency Rate (APFR) gives insight into how often customers purchase your product or service. APFR is a metric that provides a more accurate assessment of how much value customers generate over time. 

It’s used to anticipate customers’ buying cycles, which can ultimately lead to higher profits. Therefore, calculating APFR will give businesses a thorough analysis of Customer Lifetime Value and allow them to predict buying behavior better.

Formula for APFR:

The total number of purchases made by a customer during a given period divided by the number of customers during that period.

For example, if a business had 100 customers in a month and they bought a total of 500 items, the APFR would be calculated as follows:

500 sales divided by 100 customers, which is 5 sales per customer.

This means that, on average, each customer bought 5 things from the business during that month. 

This metric reveals to businesses how often customers buy from them and can help them spot patterns or trends in customer behavior. This information can be used to make it easier to keep customers and keep them coming back, as well as to improve marketing and sales strategies.

Average Customer Value (ACV)

Average Customer Value (ACV) helps to measure the monetary value associated with each individual customer over a defined period of time. 

ACV gives businesses an understanding of how much money should be spent on acquiring and retaining customers, so it’s a hugely beneficial tool for measuring success and growth.

Formula for ACV:

How much money each customer brought in over a certain period of time divided by the number of customers during that same period.

For example, if a business makes $100,000 from 500 customers over the course of a year, the average value of each customer would be $100,000 divided by 500, which is $200.

This number can help a business figure out how much value each customer brings to the company. This can help with marketing and sales strategies.

It’s also important to remember that the average customer value can change over time. To get an accurate picture of how much value each customer brings to the business, it’s a good idea to recalculate it every so often (this could be monthly, or every 6 months).

Average Customer Lifespan (ACL)

The Average Customer Lifespan (ACL) is an important metric for business owners to monitor. 

It’s a useful indicator as customers with longer lifespans tend to be more loyal, and their Customer Lifetime Value increases accordingly. The average customer lifespan is the length of time a customer keeps buying from a business.

If you want to increase Customer Lifetime Value, improving ACL is key – find ways to keep your customers engaged for longer, and you’ll start to see measurable results.

To figure it out, you’ll need to know how long it’s been since a customer made their first purchase and how long it’s been since they made their last purchase. 

Formula for ACL:

Total customer life span divided by the number of customers.

To find the total lifetime of a customer, you need to add up the time between their first and last purchases. You can find out how many customers you have by counting how many records you have for them.

For instance, let’s say you have three customers who have bought from you in the past:

Customer 1: Bought on Jan. 1, Jan. 15, and Feb. 1, 2020

Customer 2: Bought on Jan. 15, 2020, Feb. 1, 2020, and Feb. 15, 2020

Customer 3: Bought on January 1, February 1, and March 1, 2020.

To figure out how long the average customer stays with a business, you would need to know how long it was between each customer’s first and last purchase:

Customer 1: February 2, 2020 minus January 1, 2020 equals 31 days

Customer 2: February 15, 2020 – January 15, 2020 = 30 days

Customer 3: March 1, 2020 – January 1, 2020 = 60 days

Next, you’d add up the total number of days the customers were customers. In this case, that would be 121 days (31 + 30 + 60). Then, divide that total by three customers. 

In this case, 121 days divided by 3 customers = 40 days average.

Customer Retention Rate (CRR)

Customer Retention Rate (CRR) is a powerful metric for any business to measure customer loyalty and overall satisfaction. It not only strives to keep existing customers but also measures the success of a company’s relationship with them. 

For any organization to understand and measure customer loyalty, it is essential to calculate the CRR. 

Formula for CRR:

Number of customers who made additional purchases from your company during a time period divided by the number of customers at the beginning of the time period. Multiple this by 100 to express as percentage.

(Additional purchases / customers at beginning of period) X 100

For example, there were 100 customers at the start of the year. 30 made additional purchases. The formula would be:

(30/100) X 100 = 30%

An additional metric you can use with CRR is the customer churn rate, which is simply the opposite expression of CRR. In this case, it would be a 70% customer churn rate.

How to Calculate Customer Lifetime Value?

Calculating Customer Lifetime Value (CLV) is essential for any business aiming to increase customer loyalty and generate long-term profits. 

Customer Lifetime Value Formula 

To determine the entire value that a customer will contribute to a business over the length of their relationship, use the Customer Lifetime Value (CLV) calculation. 

There are actually many models often used. Choosing between them can lead to different results depending on whether a business is looking at data that already exists or trying to predict how customers will act based on what is happening now.

Predictive Customer Lifetime Value

Using regression or machine learning, the predictive CLV model predicts what existing and new customers will do when they buy.

Using the predictive model for customer lifetime value helps you determine which of your customers are the most valuable, which product or service brings in the most sales, and how you can keep customers longer.

Predictive Customer Lifetime Value is a number that shows how much money someone might spend with a company over time. 

Predictive CLV works when purchase behaviour is consistent. 

You’ll need data for:

  • Average Transactions (T): monthly average number of transactions
  • APV (defined above)
  • Average Gross Margin (AGM): the portion of sale representing profit – as percentage
  • ACL (defined above)
  • Total clients/customers

Formula for predictive customer lifetime value:

(T X APV X AGM X ACL) / Total clients

Example: In February, you had 10 purchases, an APV of $50, a 25% AGM, and ACL of 12 months, with 5 clients.

(10 X 50 X 0.25 X 12) / 5 = $300

So, the predictive CLV would be $300

Predictive Customer Lifetime Value helps companies understand what customers are worth and how much they should focus on marketing to them, track customer retention rates, identify areas for improvement, or even target customers with specific offers or promotions. 

Historical Customer Lifetime Value

The historical model uses data from the past to figure out how much a customer is worth without taking into account whether or not the customer will stay with the company. 

With the historical model, the value of your customers is based on how much they spend on average. This model will help you a lot if most of your customers only do business with you during a certain time.

But because most customer journeys are not the same, there are some problems with this model. 

Your data could be skewed if active customers who were valuable in the past stopped using your business. Inactive customers, on the other hand, might start to buy from you again, but you might not notice because you’ve marked them as “inactive.”

You’ll need data for:

  • Customer past purchases
  • Average Gross Margin (AGM): the portion of sale representing profit – as percentage

Formula for historical customer lifetime value:

(Purchase 1 + Purchase 2…) X AGM

Example: Your customer purchased 3 times and spent $1,000 each time. Your AGM is 25% as profit from all purchases. Calculation would be (1,000 + 1,000 + 1,000) X 0.25 = 750.

So, historic CLV is $750.

Traditional Cutsomer Lifetime Value Equation

We use the following CLV equation at Scaling With Systems.

APV X GM X ACL

Where, APV = Average purchase value; GM = Gross Margin; ACL = Average customer lifespan

Watch the video below for this formula explained with an example.

How to Increase Customer Lifetime Value

Once you know how to calculate lifetime value of a customer for your business through the above formulas, you can look at ways to increase the customer lifetime value.

Optimize the onboarding process

Optimizing the onboarding process is essential for enhancing customer lifetime value (CLV). Customers need to feel welcomed and valued from the very beginning in order to remain loyal and engaged over time. 

Companies must create an efficient and effective onboarding experience that makes customers feel appreciated and encourages them to keep coming back for more. Using automated software for onboarding can be super helpful. Active Campaign is a good option for this.

Increase Average Order Value (AOV)

Increasing the average order value (AOV) is an effective way to boost your customer lifetime value (CLV). With a higher AOV, you can increase your profits and make more money off of each customer without having to acquire new ones.

Some ways to increase AOV:

1. Offer incentives to customers for larger orders 

2. Create bundles of products that offer a discount when purchased together 

3. Use upselling techniques to increase the value of each order 

4. Analyze customer data to identify trends and target them with personalized offers 

5. Make sure your pricing is competitive but still profitable

6. Provide excellent customer service so customers are more likely to return and purchase again in the future  

7. Utilize loyalty programs or other rewards-based initiatives to encourage repeat purchases.

Build long-lasting relationships

One of the best ways to increase Customer Lifetime Value (CLV) is to focus on customer loyalty and retention. Provide customers with incentives for referring new customers or returning for additional purchases, such as discounts, points programs, and rewards. Increasing retention rate doesn’t have to be at the risk of losing new customers. The more happy and loyal your customers are, the more word-of-mouth referrals there can be (organic marketing is gold).

Improve Customer Service

Improving customer service is a key component of increasing Customer Lifetime Value (CLV). Companies that provide excellent customer service often have higher CLV due to their ability to keep customers engaged and loyal over time. 

Here are some strategies to help businesses improve customer service and increase their CLV: 

  • Be proactive in reaching out to customers. This can be accomplished by regularly sending emails or other types of messages that contain information about new products, promotions, and updates on current orders. 
  • Ensure customers/clients can easliy reach out to customer service representatives or your team through contact forms/email etc. Integrating a chatbot on your site can also be helpful.
  • Offer flexible shipping options, discounts/specials in pricing, membership/subscription specials, refund/returns.
  • Focus on Customer/Client fulfillment as a core part of your business strategy. Read our article on this next.

Customer Lifetime Value: FAQs

Why calculate Lifetime value for business?

Businesses use the Customer Lifetime Value (CLV) model to forecast the overall value that a customer will contribute to the firm over the length of their relationship. This enables firms to allocate resources in a way that is most likely to optimize return on investment, which can be beneficial when making marketing and sales decisions.

How do you calculate CLV for b2b?

CLV is a way to figure out how much a customer will be worth to your business over the course of their entire life. To figure out CLV, you need to know the annual revenue per customer, how long the average customer stays with the company, and how much it costs to get a new customer. You can calculate annual revenue per customer by knowing the average sale price per customer and the number of sales per year. To estimate the average customer lifetime, look at data on retention rates and churn. And finally, divide marketing and sales costs by a number of new customers in a set time period.

What is the difference between CLV and LTV?

LTV stands for the average customer value over the whole customer base, while CLV stands for the customer value for a single account. In this article, we have gone over how to measure customer lifetime value (CLV) rather than LTV.

Wrapping Up: Calculating Lifetime Value of a Customer

Knowing your customer lifetime value is a valuable metric for any organization since it enables you to determine how much revenue each client generates your business. 

By calculating CLV, businesses can make good use of their marketing and sales resources, as well as predict their future income and profits. 

Scaling With Systems helps you build out a profitable client acquisition system that is guaranteed to uplevel your business. To hear about how we can help you, book a free consultation call, and one of our advisors will reach out to you.

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